Ebix Inc (EBIX) - Description of business

Risk Factors. Except as expressly required by
the federal securities laws, the Company undertakes no obligation to update any
such factors or to publicly announce the results of , or changes to, any of, or
change, the forward-looking statements contained herein to reflect future
events or developments or changed circumstances or for any other reason. PART I Item 1. BUSINESS Ebix, Inc. (the Company), which changed its
name from ebix.com, Inc. on December 30, 2003, was founded in 1976 as
Delphi Systems, Inc., a California corporation. In this report, Ebix, Inc.
is referred to as the Company, while Ebix.com (Ebix.com is a registered
trademark of Ebix, Inc.) refers to the Companys website. The Company is an international provider of software
and Internet-based solutions for the insurance industry. International
revenue accounted for 37%, 33% and 31% of total revenue in 2005, 2004 and 2003,
respectively. Historically and during 2005, the Companys revenue has been
derived primarily from professional and support services (95% of revenue in
2005) and from the licensing and sale of software comprised of proprietary
software and third-party software (5% of revenue in 2005). Professional
services and support include software development projects, transaction based
fees, fees for software license maintenance, initial registration and ongoing
monthly subscription fees from the EbixASP product and business process
outsourcing revenue. Also included in professional services and support are
fees for consulting, implementation, training, and project management provided
to the Companys customers with installed systems and those in the process of
installing systems. On February 23, 2004 the Company acquired
LifeLink Corporation (LifeLink) located in Park City, Utah. LifeLink markets
a number of software products that provide sales illustrations and quote
comparison services to insurance carriers and wholesalers operating in the life
insurance and long-term care markets. The Company acquired all of the
outstanding stock of LifeLink from its shareholders in exchange for an
aggregate purchase price of $10,354,000, payable in cash and stock. See
note 13 to the consolidated financial statements included in this Form 10-K.
The acquisition of LifeLink has provided the Company with an entrée to the life
insurance segment of the insurance market from both the agent/broker and carrier
perspective. On May 2, 2005, the LifeLink name was changed to EbixLife
Inc. (EbixLife). On July 1, 2004, Ebix Australia Pty Ltd (VIC),
which is a wholly-owned subsidiary of the Company, acquired certain operating
assets of Heart Consulting Services Pty Ltd (Heart). Heart was a broker
systems vendor in Australia that provided end-to-end ASP broker systems to more
than 650 brokers in Australia. Under terms of the agreement, the Company
acquired the operating assets of Heart in exchange for an aggregate purchase
price of $7,116,000 payable in cash, letters of credit and stock. See note 14 to the consolidated financial statements included
in this Form 10-K. The acquisition of Heart provided us with a
significant share of the smaller broker market in Australia, substantially
raising our overall insurance broker market share in Australia. Prior to the
acquisition of certain assets of Heart, the Company had a large share of the
mid-sized broker market in Australia. Information on the Companys revenues, net income and
fixed assets in different geographic areas is furnished in note 12 to the
consolidated financial statements, included elsewhere in this Form 10-K. Industry
overview The insurance industry has
undergone significant consolidation over the past several years driven by the
need for, and benefits from, economies of scale and scope in providing
insurance in a competitive environment. Consolidation has involved both
insurance carriers and insurance brokers and is directly impacting the manner
in which insurance products are distributed. Management believes the insurance
industry will continue to experience significant changes in the next several
years to meet the changing distribution model. Changes in the insurance
industry may create both opportunities and challenges for the Company. Business
and Growth Strategy The Company intends to grow its
business in the future both organically and through additional synergistic
acquisitions. Over the past year the Company has emphasized its software
development business along with identifying synergistic acquisitions, while decreasing its emphasis on
businesses having more intense competition such as business process outsourcing
and call center. Products
and Services The Companys product and service
strategy focuses on the following five areas: (1) providing software
development services to insurance carriers, brokers and agents; (2) worldwide
sale, customization, development, implementation and support of its insurance
carrier system product, named Business Reinsurance and Insurance Company System
(BRICS); (3) worldwide sales and support of agency management systems
including EbixASP and eGlobal; (4) expansion of connectivity between
consumers, agents, carriers, and third party providers through its exchange family
of products worldwide namely, EbixLife and EbixExchange; and (5) business
process outsourcing services, which include call center and back office, either
off site or at the Companys facilities. Software delivered online through
application service provider (ASP) models and connectivity products are
recorded as services by the Company. The Company anticipates that future
revenue will be provided principally by development services, system sales, the
sale and licensing of BRICS, international operations, EbixLife, EbixExchange,
call center services and support. The Company provides development consulting to
brokers, carriers and agents. Some of the Companys recent projects for clients
include: development of a reinsurance exchange for a European company; design
and development of a carrier system over the web for a large European company;
design and development of a carrier system for a U.S. company; and development
of an online application, underwriting, policy issuance, and claims system for
an insurance carrier; development of bank assurance system for an international
broker/banker; and development and deployment of new exchange functionality in
Australia, etc. In addition, the Company has developed call center and business
process outsource operations for large brokers, insurance companies and retail
brokers. EbixLife markets a number of software products that
provide sales illustrations and quote comparison services to insurance carriers
and wholesalers operating in the life insurance, annuity and long-term care
markets. The assets of EbixLife acquired by the Company were utilized by
EbixLife in connection with the life insurance sales software applications
business, and the Company intends to continue such use of these assets into the
foreseeable future. In 2001, the Company began marketing the EbixASP
product to beta customers, and it became available to the general public in
2002. EbixASP is a web-enabled system for insurance agencies to manage their
businesses. EbixASP is sold both as a hosted and a self-hosted product.
Revenues generated from the sale of EbixASP hosted by the Company are recorded
in services revenue, while revenues generated from the sale of self-hosted
EbixASP are recorded in software revenue. The Company-hosted product generates
revenues through initial registration and ongoing monthly subscription fees
based on the number of personnel accessing the software. As a result of the
Companys acquisition of certain assets of Heart in July 2004, the Company
focuses on providing ASP based broker systems to small and midsize brokers in
the Australian market. Ebix.mall generates revenues through transaction fees
billed to insurance agencies and carriers who use the Ebix.com website. The product BRICS refers to custom software
development of systems for insurance carriers on a contractual basis. These
systems are unique for each customer and are client hosted. EbixExchange is an Internet based service developed by
the Company to facilitate connectivity for upload, download, and data exchange
between carriers, agents and third party providers and is part of the total
revenue generation from the other product offerings, which feature EbixExchange
as part of their technology. The service was completed in late 2002 and is
currently being used for the download function in EbixASP and the rating
functionality in the Companys business to consumer exchange, Ebix.mall. In May 2001,
the Company purchased the INS-Site product line. The INS-Site product line
could be characterized as an
earlier model of EbixExchange, facilitating carrier-to-agent workflow such as
download of policy information, upload of new business or policy change
requests, as well as agent inquiry of key policy information such as status,
billing and claims. INS-Site generates revenue through hosting and service
fees. The Company also continues to provide its agency
management software product line, which is comprised of eGlobal, a modular
agency management solution providing flexibility and the ability to handle
unstructured data and complex risk, and Ebix.one, a structured system
utilizing many features of the Companys previous products. The Company also
continues to support but no longer sells six legacy products: INfinity,
INSIGHT, PC-ELITE, Insurnet, SMART, and Vista. The legacy products provide
basic functions such as policy administration, claims handling, accounting, and
financial reporting. The Company expects to maintain and support the legacy
products as long as it believes there is adequate economic and strategic justification.
The Company will continue to encourage customers utilizing legacy products to
migrate to newer products. The software products offered by the Company range in
price from $85 per month per seat to $2,700 per license, depending on whether
the customers are obtaining the products through a service hosted by the
Company or hosting the products themselves, and the total contract value for
certain multiple-site global brokers can be over $1,000,000. For the years
ended December 31, 2005 and December 31, 2004, Brit Insurance
Holdings PLC (Brit) and its affiliates, accounted for approximately 16% and
18%, respectively, of consolidated revenue. See note 2 to the consolidated
financial statements included in this Form 10-K. In addition to Brit
and its affiliates, one customer, AON, accounted for approximately 11% of
consolidated revenue for the year ended December 31, 2003. AON accounted
for less than 10% of the consolidated revenue for the years ended December 31,
2005 and December 31, 2004. System
Design and Architecture The Companys new product
offerings utilize the latest Internet based architecture. eGlobal is a
client/server based system, which runs on an Oracle relational database
software technology. Ebix.one is operational on Pervasive database software. EbixASP is an e-commerce enabled agency management
system that can be hosted on an ASP basis by the Company or licensed to a
customer to self-host. The product is hosted by the Company at a fully managed
hosting facility, Sungard eSourcing (Sungard), using a MS-SQL server,
Microsoft ASP on multiple servers in a load balanced environment with
redundancy in terms of back ups and downtime. All agencies using EbixASP need
only one software product, Microsoft Internet Explorer, as the back end software
is hosted at Sungard. BRICS is a Microsoft dot net based system that can be
hosted on an ASP basis by the Company or licensed to the customer on a
self-hosted basis. EbixExchange operates on Microsoft dot net technology. INS-Site is one of the products offered by Ebix under
the EbixExchange family of products. This product allows insurance data to be
downloaded from and into multiple insurance company systems automatically. This
product is hosted by the Company. EbixLifes WinFlex is a life insurance sales
presentation system. The product is hosted by the Company at a fully managed
hosting facility, Consonus, using a MS-SQL server, Microsoft ASP on multiple
servers in a load balanced environment with redundancy in terms of back ups and
downtime. Backlog There was no
significant backlog as of December 31, 2005 or December 31, 2004. Product
Development At December 31, 2005, the
Company employed 95 (72 international and 23 domestic) full-time employees
engaged in product development activities. These activities include research
and development of software enhancements such as adding functionality,
improving usefulness, increasing responsiveness, adapting to newer software and
hardware technologies and developing and maintaining the website. Development
of custom software enhancements for customers can be used in system development
for other customers. The Companys development focus is in four areas: (i) continued
enhancement of EbixASP and eGlobal, (ii) developing technology for
insurance carriers, brokers and agents, including, in some cases, hosting the
systems developed, (iii) continued enhancement of EbixExchange, and (iv) continued
maintenance of the Ebix.com website. Product development expenditures were $3,258,000,
$3,016,000 and $1,552,000 in 2005, 2004 and 2003, respectively. Increases in
product development are a result of the acquisition of EbixLife in 2004 and an
increase in developers internationally. Product development expenditures
related to general product development and specific projects for clients. Competition Management believes
its principal competition varies by each area of focus. In the area of connectivity, the Company competes with
a large carrier owned network that provides transaction connections to agents
and carriers, and in-house systems developed by carriers. In addition, the
Company competes, to a much lesser extent, with operators of several smaller
websites that enter and leave the market on a regular basis. Key competitive features in the area of connectivity
include: (1) ability to complete end-to-end conversion of data between
systems and from input to policy issuance, (2) offerings and services for
both personal and commercial lines, (3) affording insurance customers a
marketplace in which insurance can be priced on an objective, competitive
basis, and (4) ability to complete transactions online for insurance
customers, agents, and carriers. Management believes that, overall, with
respect to Ebix.com, INS-Site, and EbixExchange, the Company competes favorably
with respect to these factors. In the area of agency management systems, while the
Company believes that EbixASP provides a strategic advantage for the Company,
two companies provide client/server software which are in competition with
those historically offered by the Company. These companies are larger than the
Company and may have greater resources. Additionally, certain large hardware
suppliers sell systems and system components to independent agencies. The
Company also experiences competition to a much lesser extent from small,
independent or freelance developers and suppliers of software who sometimes
work in concert with hardware providers to supply systems to independent
agencies. The Company believes that some insurance carriers
continue to operate subsidiaries that actively compete with the Company to
provide agency systems to their in-house agency or brokerage efforts. These
carriers generally have much greater financial resources than the Company and
have in the past subsidized the automation of independent agencies through
various incentives offered to promote the sale of the carriers insurance
products. In the area of insurance company systems, the Company
competes with established venders like Computer Science Corporation (CSC),
Rebus and PMSC. Management believes that its focus and current technology will
differentiate it from the competition. In the area of consulting, the Company competes with
hardware, development, and software providers and in-house information
technology departments in carriers and targeted clients. These companies and
carriers generally have much greater financial resources than the Company. The
Company also experiences, to a much lesser extent, competition from small,
independent or freelance developers and suppliers of software who
sometimes work in concert with hardware providers to supply consulting and
development. Key competitive factors for the Companys software,
services and consulting are product technology, features and functions, ease of
use, price, project management, service, reputation, reliability, effects of
insurance regulation, insurance knowledge, technology expertise, and quality of
customer support and training. Management believes that, overall, the Company
competes favorably with respect to these factors. Proprietary
Rights The Company regards its software
as proprietary and attempts to protect it with copyrights, trade secret laws
and restrictions on disclosure and transferring title. Despite these
precautions, it may be possible for third parties to copy aspects of the
Companys products or, without authorization, to obtain and use information
which the Company regards as trade secrets. Existing copyright law affords only
limited practical protection and the Companys software is unpatented. Employees At December 31,
2005, the Company had 229 employees, including 16 in sales and marketing, 95 in
product development, 71 in customer service and operations, 19 in call center
and 28 in general management, administration and finance. None of the Companys
employees are presently covered by a collective bargaining agreement.
Management believes that its relations with its employees are good. Item 1A. RISK
FACTORS You should carefully
consider the risks, uncertainties and other factors described below, along with
all of the other information included in this annual report on Form 10-K,
because they could materially and adversely affect our business, financial
condition, operating results and prospects and/or the market price of our
common stock. This risk factors section is written in response to the
Securities and Exchange Commissions plain English guidelines. In this
section, the words we, us, our and ours refer to the Company and not
any other person. Risks Related To Our Business and Our Industry You may have
difficulty evaluating our business because of our limited history of Internet,
call center and other business process outsourcing. Although our predecessor
began operations in 1976, we did not begin any Internet operations until September 1999
and did not begin generating revenues from these operations until the fourth
quarter of 2000. We did not begin any call center or other business process
outsourcing operations or begin generating revenues from these operations until
the first quarter of 2003. Accordingly, there is a limited history of these
operations on which you can evaluate our company and prospects. We cannot be
certain that our Internet, call center and other business process outsourcing
strategies will be successful, because these strategies are new. Our early-stage
Internet, call center and other business process outsourcing operations will be
particularly susceptible to the risks and uncertainties described in these risk
factors and more likely to incur the expenses associated with addressing them.
Our prospects must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in a transitional stage of
development, particularly companies in new and rapidly evolving markets, such
as electronic commerce, and using new and unproven business models. Because
the support revenue that we have traditionally relied upon has been steadily
declining, it is important that new sources of revenue continue to be
developed. Our revenue from the
support services we offer in connection with our legacy software products has
been decreasing significantly over the course of the past few years. This
decline can be attributed to the fact that many of our support clients are not
renewing their support agreements with us, in many cases because
they are no longer using our legacy software. Even if they are continuing to
use our legacy software, our support clients may choose not to renew their
support agreements if their legacy software products no longer require support
or they use third party support. In addition, some of the clients who use our support
services have reduced the level of support that we provide them, which in turn
reduces our support revenue. This downward trend in our support revenue makes
us particularly dependent upon our other sources of revenue. Two
customers currently provide a significant percentage of our total revenue. Revenues from one customer, Brit Insurance Holdings
PLC and its affiliates, which at March 16, 2006 owned approximately 34.0%
of our common stock and approximately 78% of CF Epic Insurance and General
Fund, which at that date owned approximately 8.1% of our common stock,
represented approximately 16% ($3,762,000) of our total revenue in 2005 and 18%
($3,551,000) of our total revenue in 2004. If revenues from this customer were
to discontinue, our operating results could be adversely affected. Revenues from another
customer, AON, represented approximately 7% ($1,594,000) and 9% ($1,856,000) of
our total revenue in 2005 and 2004, respectively. If revenues from this
customer were to discontinue, our operating results could be adversely
affected. Adverse insurance
industry economics could adversely affect our revenues. We are dependent on the
insurance industry, which may be adversely affected by current economic and
world political conditions. Our operating
results may fluctuate dramatically. Our quarterly operating results may fluctuate
significantly in the future due to a variety of factors that could affect our
revenues or our expenses in any particular quarter. You should not rely on our
results of operations during any particular quarter as an indication of our
results for a full year or any other quarter. Factors that may affect our
quarterly results may include the loss of a significant insurance agent,
carrier or broker relationship or the merger of any of our participating
insurance carriers with one another. Our operating expenses are
based in part on our expectations of our future revenues and are relatively
fixed in the short term. We may be unable to adjust spending quickly enough to
offset any unexpected revenue shortfall. We cannot predict our future capital needs and we may
not be able to secure additional financing when we need it. We may need to raise
additional funds in the future in order to fund more aggressive brand promotion
or more rapid expansion, to develop new or enhanced services, to respond to
competitive pressures or to make acquisitions. Any required additional
financing may not be available on terms favorable to us, or at all. If adequate
funds are not available on acceptable terms, we may be unable to meet our
business or strategic objectives or compete effectively. If additional funds
are raised by our issuing equity securities, stockholders may experience
dilution of their ownership interests, and the newly issued securities may have
rights superior to those of our common stock. If additional funds are raised by
our issuing debt, we may be subject to limitations on our activities. Any acquisitions that we undertake could be difficult
to integrate, disrupt our business, dilute stockholder value and harm our
operating results. In the event we complete
one or more acquisitions, we may be subject to a variety of risks, including
risks associated with an ability to integrate acquired assets or operations
into our existing operations, higher costs or unexpected difficulties or
problems with acquired assets or entities, outdated or incompatible
technologies, labor difficulties or an inability to realize anticipated
synergies and efficiencies, whether within anticipated timeframes or at all,
one or more of which risks, if realized, could have an adverse impact on our
operations. We may not be able to continue to develop new products
to effectively adjust for rapid technological changes. To be successful, we must adapt to rapidly changing
technological and market needs, by continually enhancing our website and
introducing new products and services to address our users changing demands. The marketplaces in
which we operate are characterized by: · rapidly
changing technology; · evolving
industry standards; · frequent
new product and service introductions; · shifting
distribution channels; and · changing
customer demands. Our future success will
depend on our ability to adapt to this rapidly evolving marketplace. We could
incur substantial costs if we need to modify our services or infrastructure in
order to adapt to changes affecting our market, and we may be unable to adapt
to these changes. The markets for our products are highly competitive
and are likely to become more competitive, and our competitors may be able to
respond more quickly to new or emerging technology and changes in customer
requirements. We operate in highly competitive markets. In
particular, the online insurance distribution market, like the broader
electronic commerce market, is rapidly evolving and highly competitive. Our
software business also experiences some competition from certain large hardware
suppliers that sell systems and systems components to independent agencies and
from small, independent or freelance developers and suppliers of software, who
sometimes work in concert with hardware vendors to supply systems to
independent agencies. Our Internet business may also face indirect competition
from insurance carriers that have subsidiaries which perform in-house agency
and brokerage functions. Some of our current
competitors have longer operating histories, larger customer bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we do. In addition, we believe we will face increasing
competition as the online financial services industry develops and evolves. Our
current and future competitors may be able to: · undertake
more extensive marketing campaigns for their brands and services; · devote
more resources to website and systems development; · adopt
more aggressive pricing policies; and · make
more attractive offers to potential employees, online companies and third-party
service providers. If we are unable to protect our intellectual property,
our reputation and competitiveness in the marketplace may be materially
damaged. We regard our intellectual
property in general and our software in particular as critical to our success.
It may be possible for third parties to copy aspects of our products or,
without authorization, to obtain and use
information that we regard as trade secrets. Existing copyright law affords
only limited practical protection, and our software is unpatented. If we infringe on the proprietary rights of others, we
may be at a competitive disadvantage, and any related litigation could be time
consuming and costly. Third parties may claim
that we have violated their intellectual property rights. Any of these claims,
with or without merit, could subject us to costly litigation and divert the
attention of key personnel. To the extent that we violate a patent or other
intellectual property right of a third party, we may be prevented from
operating our business as planned, and we may be required to pay damages, to
obtain a license, if available, to use the right or to use a non-infringing
method, if possible, to accomplish our objectives. We depend on the continued services of our senior
management and our ability to attract and retain other key personnel. Our future success is substantially dependent on the
continued services and continuing contributions of our senior management and
other key personnel, particularly Robin Raina, our President and Chief
Executive Officer. The loss of the services of any of our executive officers or
other key employees could harm our business. We have no long-term employment
agreements with any of our key personnel, nor do we maintain key man life
insurance policies on any of our key employees. Our future success depends
on our continuing to attract, retain and motivate highly skilled employees. If
we are not able to attract and retain new personnel, our business will be
harmed. Competition for personnel in our industry is intense. We may be unable
to retain our key employees or attract, assimilate or retain other highly
qualified employees in the future. Our international operations are subject to a number
of risks that could affect our income and growth. We market our
software internationally and plan to expand our Internet services to locations
outside of the United States. In 2004, we acquired certain assets from Heart
Consulting Services Pty. Ltd. in Australia. In addition, commencing in 2002, we
began development activities, call center services and other operations in
India. Our international operations may not produce enough revenue to justify
our investments in establishing them and are subject to other inherent risks,
including: · the
impact of recessions in foreign economies on the level of consumers insurance
shopping and purchasing behavior; · greater
difficulty in collecting accounts receivable; · difficulties
and costs of staffing and managing foreign operations; · reduced
protection for intellectual property rights in some countries; · seasonal
reductions in business activity during the summer months in Europe and other
parts of the world; · burdensome
regulatory requirements, other trade barriers and differing business practices; · fluctuations
in exchange rates; · potentially
adverse tax consequences; and · political
and economic instability. Furthermore, our entry
into additional international markets requires significant management attention
and financial resources, which could lessen our ability to manage our existing
business effectively. Laws and regulations that govern the insurance
industry could expose us or the agents, brokers and carriers who participate in
our online marketplace to legal penalties. We perform functions for
licensed insurance agents, brokers and carriers and are, therefore, required to
comply with a complex set of rules and regulations that often vary from
state to state. These rules and regulations can be difficult to comply
with and are ambiguous and open to interpretation. If we fail to properly
interpret and/or comply with these rules and regulations, we, the
insurance agents, brokers or carriers doing business with us, our officers, or
agents with whom we contract could be subject to various sanctions, including
censure, fines, cease-and-desist orders, loss of license or other penalties.
This risk, as well as other laws and regulations affecting our business and
changes in the regulatory climate or the enforcement or interpretation of
existing law, could expose us to additional costs, including indemnification of
participating insurance agents, brokers or carriers for their costs, and could
require changes to our business or otherwise harm our business. Furthermore,
because the application of online commerce to the consumer insurance market is
relatively new, the impact of current or future regulations on our business is
difficult to anticipate. To the extent that there are changes in the rules and
regulations regarding the manner in which insurance is sold, our business could
be adversely affected. Governmental regulation of the telemarketing industry
may increase our costs and restrict the operation and growth of our call center
business. The telemarketing industry
and, therefore, our call center business are subject to an increasing amount of
governmental regulation. In particular, telemarketers are now barred from
contacting persons who have registered their phone numbers on the National Do
Not Call Registry maintained by the Federal Trade Commission. We could be
subject to a variety of enforcement or private actions for our failure or the
failure of our clients to comply with these regulations. Furthermore, our costs
may increase as a result of having to comply with these regulations, and these
regulations may limit our call center activities or reduce the demand for our
call center services. Risks Related to Our Conduct of Business on The
Internet Any disruption
of our Internet connections could affect the success of our Internet based
products. Any system failure, including network, software or
hardware failure, that causes an interruption in our network or a decrease in
responsiveness of our website could result in reduced user traffic and reduced
revenue. Continued growth in Internet usage could cause a decrease in the
quality of Internet connection service. Websites have experienced service
interruptions as a result of outages and other delays occurring throughout the
Internet network infrastructure. In addition, there have been several incidents
in which individuals have intentionally caused service disruptions of major
e-commerce websites. If these outages, delays or service disruptions frequently
occur in the future, usage of our website could grow more slowly than
anticipated or decline, and we may lose revenues and customers. If the computer hardware operations that host our
website were to experience a system failure, the performance of our website
would be harmed. These systems are also vulnerable to damage from fire, floods,
earthquakes, acts of terrorism, power loss, telecommunications failures,
break-ins and similar events. Our property and business interruption insurance
coverage may not be adequate to compensate us for all losses that may occur. In
addition, our users depend on Internet service providers, online service
providers and other website operators for access to our website. Each of these
providers has experienced significant outages in the past, and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Concerns regarding security of transactions or the
transmission of confidential information over the Internet or security problems
we experience may prevent us from expanding our business or subject us to legal
exposure. If we do not offer
sufficient security features in our online product and service offerings, our
products and services may not gain market acceptance, and we could be exposed
to legal liability. Despite the measures that we may take, our infrastructure
will be potentially vulnerable to physical or electronic break-ins, computer
viruses or similar problems. If a person circumvents our security measures,
that person could misappropriate proprietary information or disrupt or damage
our operations. Security breaches that result in access to confidential
information could damage our reputation and subject us to a risk of loss or
liability. We may be required to make significant expenditures to protect
against or remedy security breaches. Additionally, if we are unable to
adequately address our customers concerns about security, we may have
difficulty selling our goods and services. Uncertainty in the marketplace regarding the use of
Internet users personal information, or proposed legislation limiting such
use, could reduce demand for our services and result in increased expenses. Concern among consumers
and legislators regarding the use of personal information gathered from
Internet users could create uncertainty in the marketplace. This could reduce
demand for our services, increase the cost of doing business as a result of
litigation costs or increased service delivery costs, or otherwise harm our
business. Legislation has been proposed that would limit the users of
personally identifiable information of Internet users gathered online or require
online services to establish privacy policies. Many state insurance codes limit
the collection and use of personal information by insurance agencies, brokers
and carriers or insurance service organizations. Moreover, the Federal Trade
Commission has settled a proceeding against one online service that agreed in
the settlement to limit the manner in which personal information could be
collected from users and provided to third parties. Future
government regulation of the Internet could place financial burdens on our
businesses. Because of the Internets
popularity and increasing use, new laws and regulations directed specifically
at e-commerce may be adopted. These laws and regulations may cover issues such
as the collection and use of data from website visitors, including the placing
of small information files, or cookies, on a users hard drive to gather
information, and related privacy issues; pricing; taxation; telecommunications
over the Internet; content; copyrights; distribution; domain name piracy; and
quality of products and services. The enactment of any additional laws or
regulations, including international laws and regulations, could impede the
growth of our revenue from our Internet operations and place additional
financial burdens on our business. Risks Related To Our Common Stock The price of our
common stock may be extremely volatile. In some future
periods, our results of operations may be below the expectations of public
market investors, which could negatively affect the market price of our common
stock. Furthermore, the stock market in general has experienced extreme price
and volume fluctuations in recent years. We believe that, in the future, the
market price of our common stock could fluctuate widely due to variations in
our performance and operating results or because of any of the following
factors which are, in large part, beyond our control: · announcements
of new services, products, technological innovations, acquisitions or strategic
relationships by us or our competitors; · trends
or conditions in the insurance, software, business process outsourcing and
Internet markets; · changes
in market valuations of our competitors; and · general
political, economic and market conditions. In addition, the market
prices of securities of technology companies, including our own, have been
volatile and have experienced fluctuations that have often been unrelated or
disproportionate to operating performance. As a result, you may not be able to
sell shares of our common stock at or above the price at which you purchase
them. In the past, following periods of volatility in the market price of a
companys securities, securities class action litigation has often been
instituted against that company. If any securities litigation is initiated
against us, we could incur substantial costs and our managements attention and
resources could be diverted from our business. The significant concentration of ownership of our
common stock will limit your ability to influence corporate actions. The concentration of ownership
of our common stock may have the effect of delaying, preventing or deterring a
change in control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
our company, and may affect the market price of our common stock. At March 16,
2006, Brit Insurance Holdings PLC beneficially owned approximately 34.0% of our
outstanding common stock and, together with our executive officers and
directors, beneficially owned approximately 54.4% of our outstanding common
stock. In addition, at March 16, 2006, CF Epic Insurance and General Fund,
of which Brit owns approximately 78% of the equity interests, beneficially
owned 8.1% of our outstanding common stock. As a result, those stockholders, if
they act together, are able to control all matters requiring stockholder
approval, including the election of all directors and approval of significant
corporate transactions and amendments to our certificate of incorporation.
These stockholders may use their ownership position to approve or take actions
that are adverse to your interests or prevent the taking of actions that are
consistent with your interests. Item 1B. UNRESOLVED
STAFF COMMENTS Not applicable.